OJ Simpson, the Real Estate Market and You

What does OJ Simpson have to do with the real estate market?

Absolutely nothing, but I just wanted to get your attention.

In the current real estate market, it's all about getting the attention. Let me tell you a quick story. I had an investor friend of mine, who had purchased a home in Riverside, California around December of 2006.

His intention was to bring it up to code and then sell for a $40,000 net profit after costs. Due to unforeseen, circumstances, he took longer than his usual 2 month-turnaround and was not ready to put his investment up for sale until 4 months later.

As you all know, 2007 has not been kind to sellers of homes and in particular investors. His house just sat for months, without any offers.To an investor, an idle home can eat up your profit in a hurry. By the time he called me, he profit had been mostly eaten up by holding costs and he was on the verge of going into the negative. Over lunch he asked for my advice.

I looked a his numbers and suggested he do two things. The first thing I told him to do, was to contact several of the top agents in his area and offer them 4% commission if they brought a buyer to them. (His home was not listed in the MLS)

After I helped him get back on his chair, I explained to him that agents are motivated to show homes that will pay them more. I also advice him to list on the MLS even if he did not want to be represented by anyone. He has been in investing for 3 years now and rarely used an agent, unlike me.

In any event, I also told him to offer full owner financing with only 5% down. He could then season the note for 3-6 months and then sell the note at roughly 92% of the face value of the note.

So after I helped him unlodge the food stuck in his throat, I expalined to him that due to the current "credit crunch", the pool of buyers was somewhat limited. By offering owner financing, he could increase the pool.

The strategy was to offer good terms, but this time the sales price was to be on the upper side of what the market was supporting. Initially, he had offered his home for $425,000, but we then raised the price to $475,000. The terms of the note was to be 5% at 8% interest only. He also decided to carry a 2nd straight note @12%. No payments due until the end of the term of the 2nd note, which would be 5 years. He opted to give any agent 3.5% if they would bring him a buyer.

Here is how the deal went:

• Sold home for $475,000 (Originally purchased for $337,000 plus $40,000 in renovations and holding costs)
• Commission of $16,625
• First TD of $400,000 sold institutional note buyer for $368,000.
• Second TD of $51,250 sold to buyer of home three months later for $35,000
• Total proceeds from sale $403,000Total costs of sale $393,625Total profit $9375

Granted he did not make the profit he had projected, he still managed to turn a loss into a profit and learned a good lesson.

Don't tell me you missed the lesson? Remember OJ Simpson? Remember I said in real estate it was all about getting your attention? Is it clear now? I hope so.

Happy selling.

How to Lower The Risk of Your Deal From Falling Apart

The guys over at Lending Clarity have posted an informative five-part series on the what to do to minimize your deal from falling apart.

Part One

Part Two

Part Three

Part Four

Part Five

The Reality of Rehabbing

Reality shows most often than not are not reality and that rings true for real estate reality shows like Flip This House from A&E.

By now you have probably heard about the trouble's A&E is having with one of it's flippers (or is it floppers?), Sam Mr. Leccima . It has been alleged that Mr. Leccima has not been as honest as he has been portrayed. According to Fox News Atlanta, Mr. Leccima and A&E have duped the public into thinking the homes that were featured were actually fixed and sold in less that 4 weeks. A&E has dropped Mr. Leccima from the show and now features one of his former team members, Angela Wilford. If memory serves me correctly Angela slapped some "sold signs" on some of the house, so she might not entirely be squeaky clean. Read more of this story here and here.

But enough of that. the purpose of this post is to show you a quick guide that your clients can read before they embark on a flip or as it used to be called a rehab. I'll use the acronym S.A.M.M.M.M. to show the different stages of reality flipping.

SEEK

The first thing your client or your self must do is find a property that is pretty much to the point of being uninhabitable. Why? Because your client needs to have enough room to make a decent profit. Your goal is to get your client to find a home that he can purchase for around 65% of the after rehab value or ARV. For the purposes of this quick guide let's assume you find a home whose ARV is $200,000. Please note that the ARV of the home can never be higher than the the highest comparable.

ACQUIRE

Based on what I said above, your client can acquire this home for around $130,000 right? Not quite. The offer needs to be around $110,000. You would think this is too small of an offer, but bear with me. The numbers will tell the story. Your client can acquire the property quickly by using sources such as a self-directed IRA or a hard money lender. If your client does use private financing or hard-money financing, be sure to add financing costs as part of the acquisition costs. Let's assume the acquisition costs are $5000.

For the purposes of this quick lesson, I won't go into much detail, but you can do the research yourself by going to websites like www.reiclub.com or www.creonline.com.

TOTAL ACQUISITION COSTS ARE $5,000

MEND

Before your client acquires the property he must have a good idea of what it would take to bring the property up to par. You need to advice him or her to use an experienced property inspector or contractor. Let's assume that he has received an estimate that the property will take $30,000 to fix. Add another $10,000 to this estimate, because trust me when I say to expect the unexpected.

TOTAL CONSTRUCTION COSTS ARE $40,000

MAINTAIN

In this stage you must take into consideration ALL holding costs. This includes taxes, interim mortgage payments, transaction costs, loan fees and whatever other holdings costs that may come up. Depending on the market plan on anywhere from 4 to 8 months of holding time. Let's assume this costs i $10,000

TOTAL HOLDING COSTS ARE $10,000

MARKET

You need to get paid don't you? And so does any other professional involved in the selling of this home. You client needs to move the property quickly, so I would offer up to 8% commission in this type of market to ensure you get as many agents as possible showing your home. You may also throw in the costs of a good staging company so that the home looks pristine. Assume you pay 7% in commission and $1000 to a staging company.

TOTAL MARKETING COSTS $15,000.

MOLLAH

This is where your client gets paid. Assume that he or she wants $20,000 out of this deal.

Now let's do the math.

$200,000-$20,000-$15,000-$10,000-$40,000-$5,000=$110,000.

The $110K is the maximum your client can offer. Heck, I would start even lower than that to give you a bit of room to negotiate.

Does this make sense? I hope so because this is reality and not a show like Flip This House. I am only giving you the basics here. There are things that I haven't covered here here like the tax ramifications in holding and selling a property less than a year, but I hope this post gives you a sense of what it really takes to "Flip a House"

Happy selling...

Fix This House? No. Fix This Show

I'm sure by now you have heard about the recent troubles of Atlanta businessman Sam Leccima and A&E"s Flip This House. It seems that Mr. Leccima has been scamming the both the viewing public and allegedly A&E as well.

Some of the alleged hoaxes were that Mr. Leccima:

• Did a poor job of fixing the properties
• Did not sell the homes as advertised
• Used his friends a stand-ins for potential buyers.

You can view the entire news story here at the Fox News-Atlanta website.

The truth is that this "reality show" does not show much reality at all. Tomorrow I'll spend a bit of time as to what the actual process of an actual rehab is. Is not a simple or as fast as some of these show make them out to be. It will be a quick lesson that you can pass on to your clients.

Beaten to the Punch-Again!!

Those of you who read this blog, have heard me rant about how most real estate agents do not understand the differences of working with typical client and a real estate investor. I've tried to give advice here and there, but Chris Smith at Equity Scout has taken the words right out of my mouth.

In one post he pretty much summarized what I have been trying to do in three months.

Oh well...

I am not ashamed to give credit where credit is due.

Chris has done an excellent job in creating a table which shows the differences between a typical seller and a real estate investor. Go read his post and let me know if you don't agree.

Speculating Is Not Really Investing

Chris Smith, at Equity Scout has written a wonderful piece comparing real estate investors to real estate speculators.

For those of you who have the experience, can you tell the difference when acquiring clients who are interested in investing? How about you newbies, can you tell who is headed for trouble and who will make money?

If you can't print out the table, Chris has created and keep it in front of you as sort of a cheat sheet.

Happy selling.....

It's Just Not the Sellers. It's the Real Estate Agents Too.

May was a productive month for me. I took care of some lingering issues that had been going on with my multi-family property and I saw around 15 potential profitable deals go by the wayside.

Now don't feel sorry for me. In fact I am quite happy it happened this way because I am beginning to hone my skills in working with real estate agents. At first I thought the problem was the sellers. I thought they were expecting too much out of the current market.

But you know, some of the problems stemmed from real estate agents as well.

Here are few things I encountered:

• Un-returned phone calls-Left messages stating nothing more than I was interested in the property, but had a few questions. Around 50% of agents never returned the call. Of the remaining, around 65% didn't return the phone call an average of 3 days later.
• Did not want to work with investors-I had pre-approval letters and proof-of-fund letters too, but no dice. Some agents pretty much ignored me as soon as they found out I was buying real estate for profit.
• Selling price was firm-Granted I did not know the selling situation of the seller, but one even mentioned that the seller had not even considered an offer that was 10K under asking price.

Here's A Niche That Is Helping Some Realtors Build Their Business

Gay buying power has led to the creation of a substantial niche real estate market, which has helped turn Puna into something of a boom town.

Witeck-Combs Communications and Packaged Facts, a division of MarketResearch.com, projected the total buying power of the U.S. gay, lesbian, bisexual and transgender adult population at $660 billion in 2007. That number, which represents a 19 percent increase over 2006, has surpassed the buying power of the Asian and Native American communities and is on par with the African-American and Hispanic markets, the survey said.

"In today's competitive marketplace, it is no longer prudent for a leading corporation to ignore the buying power of the gay market," said Wesley Combs, president of Witeck-Combs "Marketers that do risk leaving market share on the table for others to capture."

Read more....

I Wonder If This Is The New Zillow?

Berg Properties a Chicago, Illinois real estate company now offers interactive market trends graphs for homebuyers in the Chicago area. Like Zillow, I am sure there may be inherent errors in the system, but it's still a good tool for anyone who wants to better determine current real estate market conditions.

The trends that are tracked are:

• average days on market
• median price
• median inventory
• mediaan price per square foot.

The data is provided by a third-party service that scours the Internet for the data and updates once a week. Though it's not a replacement for the valuable services that agents provide, it's a good tool that your clients can use before they take the leap into real estate. Take a look at it here and tell me what you think.

Read more...

Realty Times-NAR's Second Homes Report Shows Investors, Others Still Buying

Editor's Note-While I'm pleasantly surprised to read the results of the NAR report, I still believe there will be a bumpy road ahead in real estate.

Not surprisingly, the National Association of Realtors' annual Investment and Vacation Home Buyers Survey showed that homes purchased for investment or perhaps speculation slowed in 2006, but eyebrows may bolt upwards upon hearing that second home purchases set a new record -- up from 2005, what many call the end of the so-called housing bubble.

Read more...